Rite Aid Corp., the country's largest drugstore chain, gave in to pressure from federal antitrust regulators yesterday and abandoned its $1.8 billion bid to acquire its biggest rival, Revco D.S. Inc.
Rite Aid chief executive Martin L. Grass announced the chain's decision with sharp criticism of the regulators, accusing the Federal Trade Commission of having "bowed to the . . . interests of some of the large prescription drug manufacturers.
"The FTC has never been interested in reviewing the facts surrounding our intended merger with Revco in an impartial manner," Grass said.
The FTC last week said it would file suit to try to block the merger, which would have created a company with 5,000 stores.
The FTC argued that allowing the two largest drug chains to combine would violate antitrust laws by creating a company that so dominated certain regions -- including Maryland, Virginia and seven other states -- that it could unfairly raise retail drug prices in those areas.
The FTC and Justice Department have focused much of their antitrust energy on health care in recent years, particularly on mergers of hospital companies. Generally they have settled for changes in the terms of mergers, rather than outright cancellation.
"One place where putting more antitrust resources makes sense is in the health care industry because that directly affects consumers and there's been a lot of activity in that area," said Steven A. Newborn, an antitrust lawyer in the District and former director of litigation at the FTC.
During discussions with the FTC over the last seven days, Rite Aid offered to sell off 340 drugstores, according to sources on both sides of the dispute.
But FTC regulators said the company would have to shed twice that many to make the deal acceptable to the government.
Rite Aid and other retail drugstores have argued that competition is so fierce in the retail drug industry that they cannot raise prices.
At the same time, they argue, drugmakers are raising the wholesale price of drugs. The increased buying power that the merger would have given it would have meant it could negotiate lower wholesale prices from drugmakers, which the chain would have passed on to consumers, Rite Aid argued.
Rite Aid also had argued before the FTC that the retail drug industry was easy to enter, so that if it gained enough market muscle to raise prices, Wal-Mart Stores Inc., Giant Food Inc., and other potential competitors would simply open new stores.
FTC lawyers weren't convinced. "This would have been bad for consumers," said George S. Cary, deputy director of the FTC's bureau of competition. "Our judgment was that this would eliminate competition, specifically to consumers covered under pharmacy benefit plans. That was a potential problem that a few new entrants would not remedy."
Antitrust lawyers said that Rite Aid's situation before the FTC was complicated by a potentially related investigation. The FTC is looking into whether Rite Aid earlier this year organized an illegal boycott in Maryland against the nation's largest prescription drug benefit provider, Medco Containment Services Inc., which is owned by drug giant Merck & Co.
Why would the government nix a drug store deal when many lawyers anticipate it will not try to block recently announced mergers of regional Bell telephone companies?
Antitrust lawyers say they think the government will reason that the Bell companies do not compete directly on local telephone service, even though a recently enacted federal law soon will enable them to compete in other telecommunications services.
By contrast, the lawyers say, Rite Aid and Revco were direct competitors on their core product -- prescription drugs -- in some major markets and a merger would end that competition. CAPTION: "The FTC has never been interested in reviewing the facts surrounding our intended merger with Revco . . .," Rite Aid CEO Martin L. Grass said.